I have a high level understanding for the Letter of Intent. I need to know more about it and what specific statements should be in it to protect myself. I would also like the know the process when to use the Letter of Intent, such as when to present it, how and timeframes.
If you can provide that information, a sample Letter of Intent, or put me to a worthwhile direction, I would appreciate it.
Thanks…
A letter of intent is a non-binding statement of your interest in a property. Since it is non-binding, you don’t need a lot of language to protect yourself. Personally, I never use a letter of intent since it is meaningless from a legal standpoint. If I want to buy a property, I submit a purchase agreement. When the seller signs it, you have a binding contract.
Mike
I think that a letter of intent is useful when dealing with a corporation, trust, estate or other entity that requires approval of several people. This way your contact has something in writing to bring them so they can discuss it, and you can get an idea of what terms they are willing to negotiate and what terms they are unable to negotiate. Usually this means larger purchases.
I have a couple of forms that I use. I even have one that binds both parties to the negotiation process for a few weeks. The one I like is about a half a page.
I may be wrong but I believe you are not going to get every(any) homeowner to provide you with their tax info on the property or their rental books without a contract or letter of intent. Sellers will provide you with information during your research which may or may not be realistic, which has been stated here many times.
So, what specific statement(s) would you put in a contract or letter of intent to protect yourself and to ensure the costs you’ve estimated, such as repair costs, maint, rent, vacancy, etc, are realistic? Or is there another step in the process that I’m totally overlooking?
Thanks in advance…
You’ve missed a step. It is YOUR responsibility to do the Due Diligence on the property. You should get the property tax numbers from your county auditor or tax department. I would NEVER believe the expense numbers provided by the owner. I’d venture to say that most owners who are selling their rentals don’t know the expenses for their rental. It is YOUR responsibility to determine repair costs, maintenance, vacancy, taxes, insurance, advertising, eviction expenses, court costs, legal fees, management expenses, etc, etc, etc.
Look at the leases and the owner’s tax return.
There is nothing needed in the contract because these things are YOUR responsibility.
Good Luck,
Mike
I’m fully aware that it is my responsibility. That is not in question. The question is how/when do I get the owner’s leases and tax returns? I believe the owner is not going to turn over that documentation to anyone that just ask for it. For the owner to provide that documentation, I believe they need to get something in writing, contract or letter of intent, that you’re serious about buying the property.
How do I get that documentation before I commit to ensure my numbers are accurate and for that matter, the numbers the owner is provided are valid? There needs to be something that states if the numbers don’t match what I was provided or if I undercover other issues that were not provided, I can cancel or modify my offer.
How do you do it when you want to purchase a rental property? Thanks…
I always make my contract subject to owner providing copies of lease and my review within 5 days. Additionally, with an inspection contigency that give you plenty of time to finalize your due diligence and bail out any deal. On larger properties, I expect the owner to provide numbers; otherwise I walk away. The quickest way to see if they are real is look for rounded off numbers.
For purchasing real estate, I think LOI are a waste of time. I’ve used them on very complex business contracts, but I unless you are purchasing a very large property or large group of properties, I don’t see the value. As a Seller, the last thing you want to do is get tied up with someone who is not really commited to getting the deal done.
When you submit an offer, you can make it subject to any contingency you want, and I make them contingent upon my ability to get into the property and perform inspections and follow up inspections if necessary. I also make them contingent upon my ability to get financing. Another contingency is my receipt of tenant estoppel certificates. Unless the tenant is willing to stick their neck out for the owner, they are honest when they sign this legal document which is a declaration of the rent amount, and the terms of their lease agreement. Another contingency is my reciept of the lease agreements. If the unit is vacant it really doesn't matter what it rented for last year, current rental comps would provide a clearer picture of what to expect in terms of rental income. With all of this on the table, I don't see why you would want to look at the owner's tax returns, and if I were the owner, I'm not sure I would let you see my tax returns simply because you offered to buy my property.
This language is usually in an addendum to the purchase agreement, and it should make your ascent into this deal contingent upon whatever you want. Having said that, obviously you do not want so many unreasonable contingencies that the seller thinks that you are not serious. Think about it though, unless the deal is fantastic, why would you be in such a hurry to close that you leave yourself open to surprises after the close of escrow? You should also, as an investor, be dealing with sellers that are so desperate that they will put up with almost ANY contingency.
Good Luck